Overcoming hurdles through quality
Mishnah Seth, head of Frontier Strategies at Momentum Asset Management, argues that comprehension of consumer dynamics is plainly necessary, meaning that asset managers require partnerships with companies that demonstrate insight are good allocators of funds. Sustainable distribution networks are also important in informal markets. “The operating environment in the continent is volatile, and it is important to associate with strong management teams,” says Seth. “Investment managers need to assess whether or not a company ‘delivers’ as brand loyalty is clearly visible in some countries. With disposable income still limited in many cases, consumers want to spend their money prudently.” Challenges to expansion on the continent are largely due to infrastructure constraints in the water, power, housing and transportation sectors. Similar expansion is required to motivate growth at a lower costs in other areas of many countries’ economies. Expansion in the construction sector is set to remain robust. “Although overall liquidity remains a challenge on the continent, it is believed that the region will continue to evolve and grow and, in the long term, reach levels enjoyed by other large frontier markets. Operating environments are undoubtedly a challenge and selecting companies with quality management teams is key to investment success,” Seth states.
Uganda: a case study
According to Innocent Kihika, CEO of Shonubi, Musoke & Co Advocates, investor interest in Uganda is peaking. Particularly Russia, Europe, China and South Africa all have a stake in the country already. In Uganda’s booming oil and gas sector, around 30 international companies are expected to express interest in bidding for exploration blocks that government is planning to auction off. Electricity generation is another priority, according to Kihika. “Investment in infrastructure has taken off in Uganda and is likely to have a strong knock-on effect,” added Noah Mwesigwa, partner at Shonubi Musoke. The infrastructure boom is also expected to benefit the banking sector. “There is a lot of interest from foreign banks. The interest in project finance and syndicated loans is definitely picking up and will continue.” Similarly, demand for real estate is surging. In the CBD of Kampala alone, there is a shortage of 300 000 housing units, Mwesigwa said. “The Chinese have come in with money and there will be benefits for subcontractors, and we also have developers from Europe and other places in the continent, including South Africa.” All in all, it is clear that the continent is open for business and that investors who do their homework will not be disappointed. As Peter Lloyd, partner at Gill, Godlonton & Gerrans, puts it: “This is the time to get in. The boat is not to be missed.”
Missing the boat
Yet optimism about the continent’s potential has not reached every corner. According to a recent report by McKinsey & Company, the vast majority of international businesses are still not sold on Africa’s investment opportunities. One real reason for this is the fact that information costs are high. Africa is fragmented and even in aggregate the continent is a fairly small economy. Historically, ignorance on the side of the international investor did not really matter. Most African economies were not really in a good enough state to offer many opportunities for respectable firms. In spite of the fact that Africa is growing with increasing rapidity, the organisation predicts that there will still be many investors from the Organisation for Economic Co-operation and Development (OECD) community who will stay set in their ways, and who would potentially be missing a giant business opportunity. How much of an opportunity? “It is reasonable to suppose that what is actually under the soil in the average square kilometre of Africa is at least as valuable as what is known still to be available in the OECD. An implication is that once these untapped resources have been discovered, Africa’s commodity exports will be around five times their present level,” the report states in reference to the potential for mineral resources alone. It adds that the growth of other sectors such as commodities exports and construction, as a result of resource development have already performed even better than the resource market, and would be likely to continue doing so at an increasing pace. “At present, the typical investment portfolio has massive exposure to the OECD countries and negligible exposure to Africa. This looks unlikely to be appropriate for the coming decades,” the report concludes.